The Stablecoin Triangle: An Interesting Interaction Between ETH, DAI, and MKR
Editor's note: This article comes from Orange Book (ID: orangefans), the original text comes from:medium, Author: Cyrus Younessi, Translator: Zhang Songtao, reproduced by Odaily with authorization.
MakerDAO and Dai may be the brightest Defi projects in the past year. It has only been about a year since it went online, and the ETH locked by MakerDAO has already accounted for 1.7% of the total amount of existing ETH, accounting for 90% of the locked amount in the Defi field, and it is absolutely dominant.
Decentralized stablecoins are of great significance in the Defi world. Once this key component is mature and popularized, many things that we think we cannot do now will be logically easy by then.
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ETH as digital gold
We must first accept ETH as the store of value or digital gold for the entire Ethereum. As a digital commodity, it shows us the attributes that an ideal currency wants to have. It has thus gained currency reserve status (monetary premiums). We can prove this from the fact that DEXes, Maker, and Augur, three mainstream Ethereum applications, all use ETH as a currency in circulation.
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DAI as a means of payment
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MKR as Regulatory Safeguard
Before talking about MKR, let's take a look at another stablecoin USDC. USDC is a stablecoin backed by the legal currency USD jointly launched by Circle and Coinbase. USDC guarantees that each USDC corresponds to 1 US dollar by depositing the corresponding money in the bank account. The advantage of this is that even if the transaction price on the USDC chain drops to 0.1 US dollars, customers can apply to CENTER (the control organization behind USDC) at any time to redeem their real 1 US dollar. Since each USDC can be regarded as a back guarantee corresponding to 1 US dollar, in this model, it is feasible for USDC to track the price of the US dollar and act as a stable currency of the US dollar.
USDC is not without its shortcomings, because the issuance and circulation of the US dollar is not and cannot be decentralized, so the US dollar stablecoin must be centralized. But centralization will make people worry about whether Coinbase will go bankrupt, and whether the funds deposited by customers will be misappropriated by the issuer CENTRE. So this stable currency has two risks: market risk and guarantee risk.
Market risk refers to the fact that due to poor liquidity, arbitrage transactions cause the market price to deviate from the price of $1 for a long time, which eventually led Coinbase to consider deactivating USDC. Guarantee risk refers to whether investors are assured of Coinbase, whether they can guarantee that the US dollars deposited by customers will not be misappropriated, and 100% will be paid at all times. This requires Coinbase to provide transparent and reliable external audits.
In general, the disadvantages of USDC are caused by its centralized nature. The operating mechanism of DAI can solve these disadvantages, but DAI may also encounter Soros attacks, and DAI’s continuous discount transactions may also restart the entire smart contract. At this time, our MKR can come in handy. MKR plays a role in stabilizing the currency price of Dai, because the system can generate or destroy MKR to ensure that the price of Dai is anchored at $1. Therefore, MKR holders can be regarded as regulatory guarantors, they charge a 'stability fee', and they can maximize their own interests by maintaining the stability of DAI's currency price
Due to the existence of MKR, DAI can solve market risk and guarantee risk in a decentralized way (although some people think that the Holder of MKR is also centralized in some sense), but from the perspective of one-year running time, The stable performance of the DAI currency price is commendable.
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Looking to the future of stablecoins
Maybe we will think, when ETH has obtained the status of currency in circulation, does DAI still have value? The answer is yes. At this stage, the US dollar is the most stable global currency reserve, and the existence of DAI as a shadow dollar (usdDAI) is what the cryptocurrency community needs. Perhaps in the future DAI can be expanded to euroDAI, yenDAI yen, and btcDAI bitcoin. Even, DAI can track the price of ETH and exist as ethDAI (similar to today's DAI tracking the US dollar).
Why do we still need ethDAI to track and peg ETH in the future?
Because according to the operating mechanism of DAI, it is not only putting real offline assets on the chain, but running a set of credit mechanism. It's a bit like Bretton Woods, where the dollar was pegged to gold. In the future Ethereum economic system, ETH, as the commodity currency supporting the credit currency DAI, plays the role of gold. DAI is its credit currency, and each generation of DAI is mortgaged with ETH.
On the other hand, credit currency is the embodiment of value in the time dimension (to cash out future money in the present), and it is difficult for commodity currency and credit currency to be physically interchangeable. Therefore, DAI and ETH can coexist at the same time, and we can regard ethDAI as a credit derivative of ETH digital gold. In the future, ETH will be used as digital gold, ethDAI will be used as a credit currency, and MKR will be used as a regulatory guarantee for ethDAI. The three complement each other and support each other, realizing an elegant and stable triangular relationship. It seems that this vision is still a bit far away, but for the entire Ethereum ecosystem, this will be a natural development path.
